Italy’s Prime Minister’s offer to step down did not help its bond market, as its 10-year bond yield surge to well about 7% quickly after LCH.Clearnet raise margin, and the yield curve inverted. As the world suddenly looks scarier, Euro fell and USD rose, again, very predictably. Italy is not only too big to fail, but also too big too bail. So big that even sell-side cheerleaders would tell me that “if Italy goes, we are all f**ked”.

As I said previously, there does not seem to be any easy solution that can make everyone happy. Austerity is painful for countries like Greece and others, while outright quantitative easing by the European Central Bank makes the Germans unhappy (perhaps they will be forced to do so in the end, but for now, it doesn’t look likely). Imposing more debt for these PIIGS countries do not help, and growth all over Europe is stalling. If growth is stalling, that makes the debt and deficit situation even worse. So default and restructuring will be unavoidable, but banks then suffer, and sovereigns have no firepower to save them. Is there any case for happy ending? Unfortunately, there does seem to be no such scenario, just as Free Exchange sees it:

I have been examining and re-examining the situation, trying to find the potential happy ending. It isn’t there. The euro zone is in a death spiral.

The situation is very clear: the Euro crisis can’t be solved by more meetings, summits and calls. This is not a crisis that can be solved by cutting interest rates by 25 bp or 50 bp, and probably not even cutting interest rate all the way down the zero. This is not a crisis that can be solved by more debt and financial engineering. This big macro risk is not going away, even we don’t want to see this again as everyone is bored and tired of reading idiotic headlines. We all want this to end, but there is really no end to this. At least, there is no happy ending.